September Might Surprise Currency Markets

September has not been a kind month to the U.S. dollar. The month of September proved particularly painful for the U.S. dollar in 2012 and 2013, when it lost ground against all of the G10 currencies except the Japanese yen. September 2013 proved particularly hostile for the dollar when the 10-year bond yields reversed the gains of July and August and the Federal Reserve delayed the start of tapering to December. This dollar weakness in September has been a recurring theme.

This September we might be in for a surprise compared with what history tells us. The dollar weakness is enveloped in a fog this time. We have a possible timetable for an announcement by the Fed as to when they will exit the stimulus program. It is highly unlikely that we will see a clear articulation any time soon.

The weakness trend is also going to be hampered in the second half of September if the Fed hawks arguing for earlier rate hikes get their way and make further policy inroads at the Sept. 16 and 17 Federal Open Market Committee meeting. For the dollar rally to continue, front-end interest rates have to extend the bounce of mid-August and exceed the highs of late July.

Focusing on some leading currencies now:

Euro

For the EUR/USD, September is ranked the fourth best month of the calendar year after December, November and February; however, recent events point in the other direction these days. Most banks have declared that the euro decline trend we have observed for the past few months has long legs and will continue. I have also argued the case for a weak euro and believe we will see 1.28 before we see 1.39 again. The downside potential has to also factor the policy signals of the Fed and the European Central Bank (ECB), and the negative implications on the euro land from the conflict between Russia and Ukraine. Expectations of further ECB accommodation have increased during the summer while speculation of earlier Fed tightening in 2015 has spread.
Great Britain Pound

With the possible secession of Scotland a real possibility on Sept. 18, the same bearish views as for euro also apply to the GBP. The campaign for Scottish independence has gained momentum since the second televised debate last week and thus the sterling might languish as one of the worst performers in major currencies this month, as speculation of an early rate rise by the Bank of England moves to the back burner.

NOK Will Trump the SEK

The Norwegian kroner (NOK) has been an all-time favorite of yours truly. But sticking to short-term trading fundamentals, the NOK trumped the Swedish krona (SEK) in August versus the U.S. dollar as well as the euro, and there is no reason why this should change this month.

A less-dovish central bank in Norway on Sept. 18, with the support of strong inflation and second-quarter GDP data, suggests the NOK can benefit from this and move higher.

The SEK lost ground against the U.S. dollar in August. The probability of the SEK cutting losses this month is small due to the uncertainty of the Sept. 14 general election and the possibility of political deadlock, which is likely to take a fresh toll on the currency in the short term. A tax-and-spend minority government led by the Social Democrats could delay a curbing of the country's public deficit. The forecast of the deficit was recently revised up for next year from 1.4 percent of GDP to 1.8 percent of GDP by Sweden's regulator overseeing government finances.

Overall we might see some significant currency volatility in September with a couple of curve balls thrown in for good measure.

September has not been a kind month to the U.S. dollar. The month of September proved particularly painful for the U.S. dollar in 2012 and 2013, when it lost ground against all of the G10 currencies except the Japanese yen.